New regulations already passed by the majority of states require online marketplace owners and operators to collect and remit sales taxes on behalf of their sellers. Below is a walkthrough of the new responsibilities in the form of frequently asked questions and answers (FAQ).
TL;DR: if all your marketplace sellers ship over a certain amount (usually between $100k – $250k in total) into any state then you should automate sales tax handling or could get in trouble with tax authorities. Services such as AvaTax integrate well with Spree to help you mitigate your tax-related risks.
Why are these new regulations being passed? What happened?
States are looking for new revenue sources and taxing E-Commerce businesses seems like a good idea. Death and taxes.
For many years the rule of thumb was: if the seller has a “sales tax nexus” in a state where the goods or services are shipped or sold to, so some form of physical presence (a warehouse, a factory, an office, a store), then sales tax is owed to that state. Otherwise, it isn’t and the transaction was sales tax-free.
That changed with the Supreme Court’s decision in South Dakota v. Wayfair in June 2018. That precedent triggered a landslide of new state legislation establishing a new “economic nexus” concept. If it can be proven that an E-Commerce seller or a marketplace has significant “economic and virtual contacts” affecting the state then it is required to collect and remit sales tax in that state. The new concept applies to marketplaces but also single-vendor stores.
Who is a marketplace facilitator and is required to handle taxes on behalf of marketplace sellers?
- Any online service enabling buyers and sellers to transact on the platform so any website or app offering sellers’ goods or services and collecting payments on the sellers’ behalf
- So any multi-vendor marketplace operators, auction sites, P2P marketplace or B2B marketplace operators
Payment processors or classified ads websites are NOT treated as marketplace facilitators.
What kind of marketplaces are affected by the new regulations? Are all marketplace startup companies affected?
- Startups launching their marketplace platform and not making any revenue yet don’t have to worry about the new regulations until they hit a minimum threshold defined by each state separately. States have typically set two types of thresholds:
- revenue into the particular state: between $100,000-$250,000 in gross revenue for taxable goods and services into the state per year (please check the current threshold amounts for each state),
- transaction count into that state: OR a minimum of 200 transactions per year into the state (please check the current activity threshold for each state – not all states have activity thresholds set).
- Already existing marketplaces exceeding these state thresholds or expecting rapid growth should definitely meet new sales tax regulations.
Who is obligated and responsible for the correct collection of sales tax – marketplace operator or marketplace seller?
- Generally, marketplace facilitator is responsible for tax collection under the new regulations,
- unless an error is made “due to reasonable reliance on information provided by the marketplace seller or the purchaser” (e.g., the marketplace seller lies, makes a mistake, or fails to disclose information necessary to allow the marketplace facilitators to properly report and pay sales tax owed – see more on that).
As a marketplace facilitator, should I expect a state tax audit from each state my sellers are selling to?
As a Marketplace Facilitator, how can I correctly collect sales tax for sellers if required?
- Check all current thresholds for all states your sellers are selling to and make sure you’re not exceeding any as a marketplace in total. In that case, you don’t need to worry about collecting taxes on behalf of your sellers.
- In case you are exceeding these thresholds or more importantly, you are expecting to exceed them:
- automate tax calculation and remitting using solutions such as AvaTax which works well with Spree – these solutions reduce your tax-related risks significantly,
- make sure to limit your liability by having terms & conditions requiring sellers and buyers to enable you to fulfill your requirements correctly.
Is this all I need to know?
Most probably, no. By the time you are reading this article, it may be out of date or inaccurate. You shouldn’t treat it as legal advice. Make sure to perform a state-by-state analysis of your marketplace business sales tax requirements. Consult your legal and tax support.